Plosser Says Tapering Delay Undermined Fed’s Credibility

By Joshua Zumbrun -
Oct 8, 2013

Federal Reserve Bank of Philadelphia
President Charles Plosser, an opponent of additional stimulus,
said the Fed’s decision last month not to taper its asset
purchases undermined the central bank’s credibility.

“To delay tapering of our current asset purchase scheme
without clear and significant departures from prior guidelines
suggested the FOMC was changing the goalposts and deviating from
June’s forward guidance,” Plosser said today in a speech in
Johnstown, Pennsylvania, referring to the policy-setting Federal
Open Market Committee. He doesn’t vote on the panel this year.
“This undermines the credibility of the committee and reduces
the effectiveness of forward guidance as a policy tool.”

The FOMC last month pressed on with bond purchases of $85
billion per month, awaiting further signs the economy will grow
quickly enough to bring down 7.3 percent unemployment.
Economists in a Bloomberg survey before the meeting predicted
the Fed would cut the pace of monthly purchases to $80 billion.

The Fed’s decision to press on with stimulus “contributes
to additional uncertainty regarding the future course of
monetary policy,” Plosser said.

U.S. stocks fell, with the Standard & Poor’s 500 Index
poised for its biggest two-day loss since August, as
congressional leaders said the other party must move to resolve
the government shutdown and avoid a debt default.

The S&P 500 fell 1 percent to 1,660.97 at 3:00 p.m. in New
York. The yield on the 10-year Treasury note was little changed
at 2.63 percent after rising as much as 0.03 percentage point.

Transitory Impact

“Chances are the effects of that are going to be
transitory,” Plosser said in response to audience questions
about the shutdown. “They’re not going to be positive but
they’re going to go away eventually.”

While some of his colleagues on the FOMC have voiced
concern about the lack of government economic data, Plosser said
the Fed is “not really flying blind” as long as the shutdown
doesn’t drag on. Policy makers can gather anecdotal economic
data and receive reports from private firms, he said.

The Fed can do little in response to the federal budget
deadlock, he said.

“Monetary policy can’t alleviate that uncertainty about
fiscal policy,” he said. “We can’t solve that problem. We
can’t make the public more confident about fiscal policy by
conducting monetary policy.”

More Confusion

The Fed added another layer of confusion in financial
markets with its decision to refrain from tapering, Plosser said
to reporters after his speech.

“We certainly let people continue to believe over the
course of the summer” that the Fed would taper its purchases in
September, he said. “It was a pretty good bet we were going to
do this,” and policy makers “didn’t push back on that growing
consensus.”

Economic data didn’t change sufficiently to warrant backing
off from the signals that a reduction of asset purchases was
imminent, Plosser said.

“The decision not to begin tapering our asset purchases
was also read in some quarters as a sign that the FOMC had
become much less confident that growth would be sustained in the
manner the Committee envisioned in June,” he said to the
Greater Johnstown Cambria County Chamber of Commerce. “Thus, we
undermined our own credibility as well as the public’s
confidence in the economy.”

The economy will probably grow around 2.5 percent this
year, accelerating to 3 percent next year, he said. The
unemployment rate should fall by the end 2013 to around 7
percent, and decline to 6.25 percent by the end of next year, he
said.

Reduce Pace

“Based on this outlook and the improvement in labor market
conditions, I believe it would be appropriate for the Fed to
begin to reduce the pace at which we are expanding our balance
sheet and to bring the purchase program to a close,” he said.
“We missed an excellent opportunity to begin this tapering
process in September.”

Plosser, 65, became president of the Philadelphia Fed in
August 2006. Fed presidents rotate voting on monetary policy
with Plosser voting next year.